
[Federal Register Volume 77, Number 244 (Wednesday, December 19, 2012)]
[Notices]
[Pages 75211-75223]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30553]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68433; File No. S7-13-12]


Order Granting Conditional Exemptions Under the Securities 
Exchange Act of 1934 in Connection With Portfolio Margining of Swaps 
and Security-Based Swaps

December 14, 2012.
AGENCY: Securities and Exchange Commission.

ACTION: Exemptive order; request for comment.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is issuing an order granting conditional exemptive 
relief from compliance with certain provisions of the Securities 
Exchange Act of 1934 (``Exchange Act'') in connection with a program to 
commingle and portfolio margin customer positions in cleared credit 
default swaps (``CDS''), which include both swaps and security-based 
swaps, in a segregated account established and maintained in accordance 
with Section 4d(f) of the Commodity Exchange Act (``CEA'').

DATES: Effective Date: This exemptive order is effective on December 
19, 2012. Comments Due Date: Comments must be received on or before 
February 19, 2013.

ADDRESSES: Comments may be submitted, identified by File Number S7-13-
12, by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-13-12 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090. All submissions should refer to File Number 
S7-13-12. This file number should be included on the subject line if 
email is used. To help us process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec/gov/rules/other.shtml). Comments are also available for Web site viewing 
and printing in the Commission's Public Reference Room, 100 F Street 
NE., Washington, DC 20549, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. All comments received will be posted 
without charge; the Commission does not edit personal identifying 
information from submissions. You should only submit information that 
you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Emily Westerberg Russell, Senior 
Special Counsel, Catherine Moore, Senior Special Counsel, and Natasha 
Vij Greiner, Special Counsel, at 202-551-5550, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-7010.

I. Introduction

    On July 21, 2010, President Barack Obama signed the Dodd-Frank Act 
into

[[Page 75212]]

law.\1\ Title VII of the Dodd-Frank Act (``Title VII'') establishes a 
regulatory regime applicable to the over-the-counter (``OTC'') 
derivatives markets. Title VII provides the Commission and the 
Commodity Futures Trading Commission (``CFTC'') with tools to oversee 
these markets.\2\ Under the comprehensive framework established in 
Title VII, the SEC is given regulatory authority over security-based 
swaps, and the CFTC is given regulatory authority over swaps.\3\ The 
Dodd-Frank Act amended the Exchange Act to require, among other things, 
that transactions in security-based swaps be cleared through a clearing 
agency that is registered with the Commission or that is exempt from 
registration, if the security-based swaps are of a type that the 
Commission determines must be cleared, unless an exception or exemption 
from mandatory clearing applies.\4\ The Dodd-Frank Act similarly 
amended the CEA.\5\ In addition, the Dodd-Frank Act provided the SEC 
and CFTC with explicit authority to facilitate portfolio margining by 
allowing cash and securities to be held in a futures account, and 
futures and options on futures and related collateral to be held in a 
securities account, subject to certain conditions.\6\
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    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203,124 Stat. 1376 (2010).
    \2\ Generally, Subtitle A of Title VII creates and relates to 
the regulatory regime for swaps, while Subtitle B of Title VII 
creates and relates to the regulatory regime for security-based 
swaps.
    \3\ See Section 3(a)(68) of the Exchange Act, 15 U.S.C. 
78c(a)(68) (as added by Section 761(a)(6) of the Dodd-Frank Act) and 
Section 1a(47) of the CEA, 7 U.S.C. 1a(47) (as added by Section 
721(a) of the Dodd-Frank Act) for the definitions of security-based 
swap and swap, respectively. See also Further Definition of 
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap 
Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, Exchange Act Release No. 67453 (Jul. 18, 2012), 77 FR 
48207 (Aug. 13, 2012) (Joint Final Rule with the CFTC) (``Product 
Definitions Adopting Release''), further defining the terms swap and 
security-based swap.
    \4\ See Section 763(a) of the Dodd-Frank Act (adding new Section 
3C(a)(1) to the Exchange Act). 15 U.S.C. 78c-2.
    \5\ See Section 723(a)(3) of the Dodd-Frank Act (adding new 
Section 2(h)(1)(A) to the CEA).
    \6\ See Section 713 of the Dodd-Frank Act. Under Section 713 of 
the Dodd-Frank Act, dually-registered broker-dealers and futures 
commission merchants may portfolio margin pursuant to an approved 
portfolio margin program, subject to certain requirements, including 
regulatory action by the SEC and CFTC (pursuant to an exemption, or 
by rule or regulation). See Exchange Act Section 15(c)(3)C and CEA 
Section 4d(h). See also infra note 23.
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    On December 16, 2011, the Commission approved a request by a 
clearing agency for portfolio margining of clearing members' 
proprietary security-based swaps and swap positions consisting of 
single-name CDS and CDS indices, respectively.\7\ Under such a 
portfolio margining arrangement, clearing members are able to maintain 
reduced levels of margin that are commensurate with the risks of the 
portfolio based on correlations in a member's cleared CDS positions 
consisting of both swaps and security-based swaps.
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    \7\ See Order Approving Proposed Rule Change to Adopt ICC's 
Enhanced Margin Methodology, Exchange Act Release No. 66001 (Dec. 
16, 2011).
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    Market participants have also sought the use of similar portfolio 
margining arrangements in the context of customer positions in CDS. On 
November 7, 2011, ICE Clear Credit, LLC (``ICE Clear Credit'') filed 
with the Commission a petition for rulemaking, regulation or order to 
provide exemptive relief from certain Exchange Act provisions to allow 
portfolio margining treatment for customer-related positions in 
anticipation of ICE Clear Credit offering clearing of security-based 
swaps for customer-related transactions.\8\ ICE Clear Credit requested 
exemptive relief from the application of certain provisions of the 
Exchange Act to allow ICE Clear Credit, and any ICE Clear Credit member 
that is a dually-registered broker-dealer and futures commission 
merchant (``BD/FCM''), to, among other things: (1) Hold customer assets 
used to margin, secure, or guarantee customer positions consisting of 
cleared CDS, which include both swaps and security-based swaps, in a 
commingled customer omnibus account subject to Section 4d(f) of the 
CEA; and (2) calculate margin for this commingled customer account on a 
portfolio margin basis.\9\ ICE Clear Europe Limited (``ICE Clear 
Europe'') also requested substantially similar relief for itself and 
its members.\10\
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    \8\ ICE Clear Credit formally petitioned the Commission to grant 
exemptive relief from the application of Section 15(c)(3), Rule 
15c3-3 and related rules under the Exchange Act. See Letter from 
Michael M. Phillip, Partner, Winston & Strawn LLP (Nov. 7, 2011) 
(the petition and comments received on the petition are on file at 
the Commission's Web site at http://www.sec.gov/rules/petitions.shtml).
    \9\ Id.
    \10\ See Letter from Paul Swann, President and Chief Operating 
Office, ICE Clear Europe Limited (May 31, 2012) (on file as a 
comment to the ICE Clear Credit petition at http://www.sec.gov/comments/4-641/4641-5.pdf).
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    The Commission has received four comment letters, one of which was 
provided by ICE Clear Credit. All of these letters supported ICE Clear 
Credit's request for relief.\11\ Commenters generally argued that 
portfolio margining of customer positions in CDS removes economic 
barriers to customer clearing and would encourage greater clearing, 
thereby reducing systemic risk.\12\ One commenter stated that a 
portfolio margining program for customer accounts could also improve 
competitiveness between market participants who are not clearing 
members and those that are clearing members who are already permitted 
to portfolio margin in their proprietary accounts.\13\ Certain 
commenters addressed additional issues associated with the approval of 
ICE Clear Credit's request for relief, including concerns relating to a 
potential requirement to provide customers the ability to choose an 
account type and a request for certainty about the applicable 
bankruptcy regime, which are more specifically addressed, where 
appropriate, below.\14\ Additionally, one commenter argued that the 
Commission should provide equivalent relief to all clearing agencies 
seeking exemptive relief, stating that different approaches could lead 
to inefficiencies in the market because market participants may choose 
to clear at a particular clearinghouse based on the applicable 
regulatory standards rather than market efficiencies.\15\
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    \11\ See letter from Managed Funds Association dated June 13, 
2012 (``MFA Letter''); letter from Investment Company Institute 
(``ICI Letter'') dated April 9, 2012; letter from ICE Clear Credit 
LLC dated December 22, 2011 (``ICE Letter''); and letter from 
Association of Institutional Investors dated December 22, 2011.
    \12\ Id.
    \13\ See, e.g., MFA Letter.
    \14\ See ICE Letter, MFA Letter, and ICI Letter.
    \15\ See ICI Letter.
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II. Discussion

    Portfolio margining of index CDS (subject to CFTC regulations) \16\ 
and single-name CDS (subject to SEC regulations) can offer many 
benefits to investors and the markets, including promoting greater 
efficiencies in clearing with respect to off-setting positions and 
thereby aligning costs more closely with overall risks presented by an 
investor's portfolio. Further, portfolio margining may help to 
alleviate excessive margin calls, improve cash flows and liquidity, and 
reduce volatility.
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    \16\ Index CDS that are currently cleared are generally swaps 
subject to CFTC regulation. The definition of ``narrow-based 
security index'' is used to help in distinguishing between certain 
swaps, such as index CDS, and security-based swaps. See Product 
Definitions Adopting Release.
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    At the same time, facilitating portfolio margining for customer-
owned swaps requires careful consideration to ensure that customer 
protection concerns are appropriately addressed, as well as to promote 
appropriate risk management and disclosure. The Commission is

[[Page 75213]]

mindful of the need to address these issues.
    Accordingly, after careful consideration of the requests before the 
Commission, comments received, and the relevant statutory provisions, 
the Commission is acting to provide conditional exemptive relief to 
facilitate portfolio margining treatment for customer-related positions 
in CDS that are cleared pursuant to the terms of this Order.

A. Relevant Provisions

    Section 3E of the Exchange Act, as established pursuant to Section 
763 of the Dodd-Frank Act, sets forth the framework for the segregation 
of assets held as collateral in security-based swap transactions. 
Section 3E(b)(1) of the Exchange Act provides that a broker, dealer, or 
security-based swap dealer shall treat and deal with all money, 
securities, and property of any security-based swap customer received 
to margin, guarantee, or secure a cleared security-based swap 
transaction as belonging to the customer.\17\ Section 3E(b)(2) of the 
Exchange Act provides that the money, securities, and property shall be 
separately accounted for and shall not be commingled with the funds of 
the broker, dealer, or security-based swap dealer or used to margin, 
secure, or guarantee any trades or contracts of any security-based swap 
customer or person other than the person for whom the money, 
securities, or property are held.\18\ Section 3E(c)(1) of the Exchange 
Act provides that, notwithstanding Section 3E(b) of the Exchange Act, 
money, securities, and property of cleared security-based swap 
customers of a broker, dealer, or security-based swap dealer may, for 
convenience, be commingled and deposited in the same one or more 
accounts with any bank, trust company, or clearing agency.\19\ Section 
3E(c)(2) of the Exchange Act further provides that the Commission may, 
notwithstanding Section 3E(b) of the Exchange Act, by rule, regulation, 
or order prescribe terms and conditions under which any money, 
securities, or property of a customer with respect to cleared security-
based swaps may be commingled and deposited with any other money, 
securities, or property received by the broker, dealer, or security-
based swap dealer and required by the Commission to be separately 
accounted for and treated and dealt with as belonging to the security-
based swap customer of the broker, dealer, or security-based swap 
dealer.\20\ Section 3E(d) of the Exchange Act restricts the ability to 
invest such money, securities, and property of the security-based swap 
customer,\21\ and Section 3E(e) of the Exchange Act places certain 
prohibitions on the disposition and use of customer money, securities, 
and property of a security-based swap customer by any person, including 
any clearing agency and any depository institution that has received 
any money, securities, or property for deposit in a separate account or 
accounts, as provided in Section 3E(b) of the Exchange Act.\22\ 
Finally, Section 3E(g) of the Exchange Act provides that an account 
holding a security-based swap, other than a portfolio margining account 
referred to in Section 15(c)(3)(C) of the Exchange Act, shall be 
considered to be a securities account, as defined in 11 U.S.C. 741.\23\
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    \17\ See Section 3E(b)(1) of the Exchange Act (15 U.S.C. 78c-
5(b)(1)) (as added by Section 763(d) of the Dodd-Frank Act).
    \18\ See Section 3E(b)(2) of the Exchange Act (15 U.S.C. 78c-
5(b)(2)) (as added by Section 763(d) of the Dodd-Frank Act).
    \19\ See Section 3E(c)(1) of the Exchange Act (15 U.S.C. 78c-
5(c)(1)) (as added by Section 763(d) of the Dodd-Frank Act).
    \20\ See Section 3E(c)(2) of the Exchange Act (15 U.S.C. 78c-
5(c)(2) (as added by Section 763(d) of the Dodd-Frank Act).
    \21\ 15 U.S.C. 78c-5(d) (as added by Section 763(c) of the Dodd-
Frank Act).
    \22\ 15 U.S.C. 78c-5(e) (as added by Section 763(c) of the Dodd-
Frank Act).
    \23\ Solely for purposes of Section 3E(g) of the Exchange Act, 
the Commission interprets ``a portfolio margining account referred 
to in section 15(c)(3)(C)'' to include a portfolio margining account 
that is maintained in accordance with the terms of this Order.
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    Section 15(c)(3) of the Exchange Act and Rule 15c3-3 \24\ also 
provide for the protection of customer securities and funds. 
Specifically, under Section 15(c)(3) of the Exchange Act, the SEC may 
prescribe rules and regulations ``to provide safeguards with respect to 
the financial responsibility and related practices of brokers and 
dealers, including, but not limited to, the acceptance of custody and 
use of customers' securities and the carrying and use of customers' 
deposits or credit balances.'' \25\ Under Exchange Act Rule 15c3-3, a 
broker-dealer must, in essence, segregate customer funds and fully paid 
and excess margin securities held by the firm for the accounts of 
customers. The intent of the rule is, among other things, to 
``facilitate the liquidations of insolvent broker-dealers and to 
protect customer assets in the event of a SIPC liquidation through a 
clear delineation in Exchange Act Rule 15c3-3 of specifically 
identifiable property of customers.'' \26\ Absent an exemption, a 
broker-dealer would be required to comply with applicable provisions of 
Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder as they 
relate to all securities, including security-based swaps.\27\
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    \24\ 17 CFR 240.15c3-3.
    \25\ 15 U.S.C. 78o(c)(3).
    \26\ See Broker-Dealers; Maintenance of Certain Basic Reserves, 
Exchange Act Release No. 9856 (Nov. 10 1972), 37 FR 25224 (Nov. 29, 
1972).
    \27\ In addition to the Exchange Act provisions specific to 
security-based swaps, there are Exchange Act provisions applicable 
to ``securities'', which would apply to security-based swaps. 
Section 761 of the Dodd-Frank Act amended the definition of 
``security'' under the Exchange Act to include security-based swaps. 
See Exchange Act Section 3(a)(10), 15 U.S.C. 78c(a)(10) (as revised 
by Section 761 of the Dodd-Frank Act). The Commission approved an 
order granting temporary relief and providing interpretive guidance 
to make it clear that a substantial number of the requirements of 
the Exchange Act would not apply to security-based swaps when the 
revised definition of ``security'' went into effect on July 16, 
2011. Order Granting Temporary Exemptions under the Securities 
Exchange Act of 1934 in Connection with the Pending Revision of the 
Definition of ``Security'' to Encompass Security-Based Swaps, and 
Request for Comment, Exchange Act Release No. 64795 (July 1, 2011) 
(``Exchange Act Exemptive Order''). While the Exchange Act Exemptive 
Order provided registered broker-dealers a limited exemption from 
Section 15(c)(3) of the Exchange Act and rules thereunder in 
connection with security based-swaps (to the extent that these 
provisions do not apply to security-based swap activities or 
positions as of July 15, 2011), the exemption from Exchange Act Rule 
15c3-3 is not available for the broker-dealer's activities and 
positions related to cleared security-based swaps, to the extent 
that the broker-dealer is a member of a clearing agency that 
functions as a central counterparty for security-based swaps, and 
holds customer funds or securities in connection with cleared 
security-based swaps, because at the time the exemption was granted 
no clearing agencies were clearing security-based swaps. Id. 
Accordingly, relief separate from Section 15(c)(3) of the Exchange 
Act and Rule 15c3-3, and certain other Exchange Act provisions 
applicable to ``securities'' discussed herein, is necessary to 
permit the commingling and portfolio margining of customer positions 
in cleared CDS.
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    Section 724 of the Dodd-Frank Act added provisions to Section 4d of 
CEA that perform functions similar to those in Section 3E of the 
Exchange Act in creating a segregation framework for swap 
customers.\28\ Accordingly, in order to permit collateral related to 
cleared security-based swaps to be commingled with that related to 
cleared swaps for purposes of portfolio margining and to operate under 
the segregation framework for swaps, a broker-dealer would need relief 
from the applicable provisions of Section 3E and Section 15(c)(3) of 
the Exchange Act as well as Rule 15c3-3 thereunder. Similarly, a 
clearing agency would need relief from applicable provisions of Section 
3E of the Exchange Act.\29\
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    \28\ See 7 U.S.C. 6d(f) (as added by Section 724 of the Dodd-
Frank Act).
    \29\ The CFTC would also need to provide relief to allow 
security-based swaps to be commingled with swaps in an account 
maintained in accordance with Section 4d(f) of the CEA. The 
Commission notes that the CFTC has also received similar requests 
for relief. See Letter from Michael M. Phillip, Partner, Winston & 
Strawn LLP (Oct. 4, 2011) (the petition and comments received on the 
petition are on file at the CFTC's Web site at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=CommissionOrdersandOtherActionsAD&Key=22685).

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[[Page 75214]]

    Moreover, Exchange Act Rules 8c-1 and 15c2-1 (``hypothecation 
rules'') prohibit, among other things, a broker-dealer from commingling 
customer securities (the term ``customer'' for this purpose generally 
includes affiliates of the broker-dealer) with its own proprietary 
securities under a lien for a loan made to such broker-dealer.\30\ 
However, pursuant to the CFTC Part 22 Rules, the money, securities, and 
property of an affiliate (as defined in association with the definition 
of ``Cleared Swaps Proprietary Account'' pursuant to CFTC Rule 22.1) 
\31\ of an intermediary (i.e., BD/FCM) must be held in a Cleared Swaps 
Proprietary Account in accordance with the CFTC regime in order to 
permit such affiliates to use portfolio margining for CDS.\32\ Absent 
an exemption, affiliates of a broker-dealer that are not excluded from 
the definition of customer in the hypothecation rules are customers 
whose securities positions cannot be commingled with the broker-
dealer's proprietary securities and therefore could not be held in a 
Cleared Swap Proprietary Account, as required by the CFTC's Part 22 
Rules.\33\
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    \30\ 17 CFR 240.8c-1 and 17 CFR 240.15c2-1. The term 
```customer'' is defined in paragraph (b)(1) of the hypothecation 
rules and excludes any general or special partner or any director or 
officer of such broker-dealer, or any participant, as such, in any 
joint, group or syndicate account with such broker-dealer or with 
any partner, officer, or director thereof.
    \31\ Cleared Swaps Proprietary Account means an account for 
cleared swaps and associated collateral that is carried on the books 
and records of a FCM for persons with certain relationships with 
that FCM, including applicable affiliates. In association with the 
definition of a Cleared Swaps Proprietary Account, an ``affiliate'' 
is defined to include a person, directly or indirectly, controls 
such individual, partnership, corporation or association or, 
directly or indirectly, is controlled by or is under common control 
with, such individual, partnership, corporation or association. See 
CFTC Rule 22.1, 17 CFR 22.1.
    \32\ Under CFTC Rule 22.1, a firm that is an affiliate of a FCM 
would not be a cleared swaps customer, which is defined as any 
person entering into a cleared swap, excluding any owner or holder 
of a Cleared Swaps Proprietary Account with respect to the cleared 
swaps in such account and a clearing member of a DCO with respect to 
cleared swaps cleared on that DCO. See CFTC Rule 22.1, 17 CFR 22.1. 
Thus, such an affiliate would not be a customer for purposes of a 
customer portfolio margining program with respect to swaps and 
security-based swaps.
    \33\ The Exchange Act Exemptive Order provided registered 
broker-dealers a temporary exemption from these rules, which expires 
on February 11, 2013. While the Commission will consider the 
appropriate treatment of security-based swaps under the provisions 
of the Exchange Act not amended by the Dodd-Frank Act before 
expiration of the exemptions set forth in the Exchange Act Exemptive 
Order, including Exchange Act Rules 8c-1 and 15c2-1, the Commission 
believes that it is appropriate to provide relief from these rules 
in the context of this order. See Product Definitions Adopting 
Release.
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B. Exemptive Relief

    Given the above requirements for the segregation of assets held as 
collateral under the Exchange Act, absent relief by the Commission, 
participants would not be able to operate in accordance with both the 
Exchange Act and the CEA and establish a program to commingle and 
portfolio margin cleared customer positions in CDS, which include both 
swaps and security-based swaps. The Commission has received requests to 
provide certain exemptive relief \34\ to facilitate the establishment 
of a program providing for portfolio margining of cleared customer 
positions in CDS. Such a program has the potential to reduce clearing 
costs through the integration of clearing functions and the potential 
reduction of margin requirements by taking into account offsetting 
positions. As discussed above, Section 3E(c)(2) of the Exchange Act 
provides that, notwithstanding Section 3E(b) of the Exchange Act, in 
accordance with any terms and conditions the Commission may prescribe 
by rule, regulation, or order, any money, securities, or property of 
the security-based swaps customer of a broker, dealer, or security-
based swap dealer described in Section 3E(b) of the Exchange Act may be 
commingled and deposited as provided in Section 3E of the Exchange Act 
with any other money, securities, or property received by the broker, 
dealer, or security-based swap dealer and required by the Commission to 
be separately accounted for and treated and dealt with as belonging to 
the security-based swaps customer of the broker, dealer, or security-
based swap dealer.
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    \34\ See supra notes 8 and 10.
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    In addition, Section 36 of the Exchange Act authorizes the 
Commission to conditionally or unconditionally exempt any person, 
security, or transaction, or any class or classes of persons, 
securities, or transactions, from certain provisions of the Exchange 
Act or certain rules or regulations thereunder, by rule, regulation, or 
order, to the extent that such exemption is necessary or appropriate in 
the public interest, and is consistent with the protection of 
investors.\35\
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    \35\ 15 U.S.C. 78mm(a)(1).
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    After careful consideration, the Commission believes that providing 
certain conditional exemptive relief to facilitate portfolio margining, 
as outlined below, is necessary or appropriate in the public interest, 
and is consistent with the protection of investors, because it would 
promote a more accurate measure of the risk of the total position of 
the customer based on off-setting positions. Portfolio margining would 
also increase efficiency and reduce costs by closely aligning the costs 
of maintaining a portfolio of cleared CDS to the risks presented by 
such a portfolio. Moreover, the conditions to the exemption will 
provide restrictions designed to protect money, securities, and 
property of a security-based swap customer, to address certain 
differences in the statutory requirements of the Exchange Act and CEA, 
and to promote appropriate risk management and disclosure.
    Specifically, consistent with the discussion on the need for relief 
to facilitate portfolio margining outlined above under the heading 
``Relevant Provisions,'' pursuant to Section 3E(c)(2) and Section 36 of 
the Exchange Act, the Commission finds that it is necessary or 
appropriate in the public interest and is consistent with the 
protection of investors to exercise its authority to grant the 
following conditional exemptions: \36\
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    \36\ The following conditional exemptions do not in any way 
limit the Commission's authority to oversee or regulate security-
based swaps under the Exchange Act with respect to provisions that 
are not subject to the exemptions, including, among others, the 
antifraud and anti-manipulation provisions and the Commission's 
examination authority provisions.
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    (1) An exemption from Sections 3E(b), (d), and (e) of the Exchange 
Act and any rules thereunder for a clearing agency registered pursuant 
to Section 17A of the Exchange Act and registered as a derivatives 
clearing organization pursuant to Section 5b of the CEA (``clearing 
agency/DCO''),\37\ solely to perform the functions of a clearing agency 
for CDS under a program to commingle and portfolio margin CDS for 
customer positions; and
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    \37\ An entity that clears both security-based swaps and swaps 
is required to be dually registered as a clearing agency/DCO. See 
Section 17A(g) of the Exchange Act, (requiring that clearing 
agencies that clear security-based swaps be registered with the 
Commission) and Section (h) of the CEA (requiring that DCOs that 
clear swaps be registered with the CFTC).
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    (2) An exemption from Sections 3E(b), (d), and (e) of the Exchange 
Act and Section 15(c)(3) of the Exchange Act and Rule 15c3-3 
thereunder,\38\ and from any

[[Page 75215]]

requirement to treat an affiliate (as defined in association with the 
definition of ``Cleared Swaps Proprietary Account'' pursuant to CFTC 
Rule 22.1) as a customer for purposes of Exchange Act Rules 8c-1 and 
15c2-1, for BD/FCMs that elect to offer a program to commingle and 
portfolio margin customer positions in CDS in customer accounts 
maintained in accordance with Section 4d(f) of the CEA and the rules 
thereunder.
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    \38\ ICE Clear Credit and ICE Clear Europe also requested 
exemptive relief from Rules 15c3-1, 17a-3, 17a-4, 17a-5 and 17a-
11(c)(2) of the Exchange Act for their members engaged in the 
portfolio margining program. However, compliance with these rules 
depends upon the application of Exchange Act Rule 15c3-3 to CDS 
covered by the portfolio margining program contemplated under this 
Order. Therefore, because the Commission is already providing 
conditional exemptive relief from Section 15(c)(3) of the Exchange 
Act and Rule 15c3-3 thereunder, the Commission does not need to 
provide separate exemptive relief from these provisions with respect 
to the portfolio margining program contemplated under this Order.
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    As discussed in more detail below, this relief is subject to 
certain conditions that are designed to help ensure the protection of 
money, securities, and property received from a security-based swap 
customer, as well as to address certain differences in the statutory 
requirements of the Exchange Act and CEA and promote appropriate risk 
management and disclosure. In particular, the conditions seek to 
preserve customers' ability to select between the segregation 
requirements and customer protections afforded a securities account 
subject to the Exchange Act and the requirements and protections 
afforded a swap account subject to the CEA, help ensure that BD/FCMs 
collect sufficient margin from customers to address the risk presented 
by this business, and help ensure that customers receive relevant 
disclosures about the legal framework that will apply to their CDS 
transactions.

C. Conditional Exemptions for Clearing Agencies/DCOs From Sections 
3E(b), (d) and (e) of the Exchange Act

    As summarized above, pursuant to Section 3E(c)(2) and Section 36 of 
the Exchange Act from Sections 3E(b), (d), and (e) of the Exchange Act 
and any rules thereunder, the Commission is issuing an exemption to a 
clearing agency/DCO. This exemption is available to a clearing agency/
DCO solely to perform the functions of a clearing agency for CDS under 
a program to commingle and portfolio margin cleared CDS for customer 
positions. This exemption is subject to five conditions that are 
designed to help safeguard customer money, securities, and property and 
promote the ability of customers to select an appropriate framework for 
the segregation of assets.
    The first two conditions are intended to provide for portfolio 
margining within a securities account as an alternative for customers 
that may desire to conduct portfolio margining under a securities 
account structure as opposed to in a swaps account, once the Commission 
adopts final rules setting forth margin and segregation requirements 
applicable to security-based swaps consistent with Section 3E of the 
Exchange Act (``final margin and segregation rules for security-based 
swaps'').\39\
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    \39\ The Commission has proposed margin, and segregation 
requirements for security-based swap dealers and major security-
based swap participants. See Capital, Margin, and Segregation 
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers 
(``Capital, Margin, and Segregation Requirements Adopting 
Release''), Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 
70213 (Nov. 23, 2012), at http://www.gpo.gov/fdsys/pkg/FR-2012-11-23/pdf/2012-26164.pdf. Once adopted, the Commission's rules would 
help establish a more permanent framework for the availability of a 
securities account as an alternative for customer accounts holding 
both security-based swaps and swaps. As a result, the Commission may 
provide further guidance on the application of the exemptive relief 
provided in this Order after the final rules related to margin and 
the segregation requirements of security-based swaps are adopted by 
the Commission.
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    Specifically, the first condition requires that the clearing 
agency/DCO, by the later of (i) six months after the adoption date of 
the final margin and segregation rules for security-based swaps or (ii) 
the compliance date of such rules, take all necessary action within its 
control to obtain any relief needed to permit its BD/FCM clearing 
members to maintain customer money, securities, and property received 
by the BD/FCM to margin, guarantee, or secure customer positions in CDS 
in a segregated account established and maintained in accordance with 
Section 3E of the Exchange Act and any rules thereunder for the purpose 
of clearing (as a clearing member of the clearing agency/DCO) such 
customer positions under a program to commingle and portfolio margin 
CDS. Under this condition, a clearing agency/DCO would be required to 
have taken steps, by the later of six months after the adoption date of 
final rules or the compliance date of such rules, that are within its 
control to obtain relief from all appropriate regulatory agencies, 
including submitting any applicable request for relief and working 
diligently to address any questions or issues raised by regulators.\40\
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    \40\ The Commission anticipates that the CFTC will consider 
appropriate regulatory action to facilitate portfolio margining.
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    The second condition requires that the clearing agency/DCO, by the 
later of (i) six months after the adoption date of final margin and 
segregation rules for security-based swaps or (ii) the compliance date 
of such rules, take all necessary action within its control to 
establish rules and operational practices to permit a BD/FCM (at the 
BD/FCM's election) to maintain customer money, securities, and property 
received by the BD/FCM to margin, guarantee, or secure customer 
positions in cleared CDS, which include both swaps and security-based 
swaps, in a segregated account established and maintained in accordance 
with Section 3E of the Exchange Act and any rules thereunder for the 
purpose of clearing (as a clearing member of the clearing agency/DCO) 
such customer positions under a program to commingle and portfolio 
margin CDS. Until the clearing agency/DCO has developed such rules and 
operational practices, the clearing agency/DCO must have in place rules 
requiring BD/FCM clearing members to maintain customer money, 
securities, and property received to margin, guarantee, or secure 
customer positions consisting of cleared CDS, which include both swaps 
and security-based swaps, in a segregated account established and 
maintained in accordance with Section 4d(f) of the CEA and rules 
thereunder for the purpose of clearing (as a clearing member of the 
clearing agency/DCO) such customer positions under a program to 
commingle and portfolio margin CDS. This condition would ensure that 
all customer assets are segregated and subject to appropriate 
regulatory oversight.
    Some commenters raised certain issues associated with a requirement 
that market participants be provided a choice in account structure. 
Specifically, ICE Clear Credit stated that offering customers a choice 
would require changes at ICE Clear Credit and each of its participant 
BD/FCMs and result in needless additional costs.\41\ ICE Clear Credit 
stated that few, if any, customers would choose an account established 
in accordance with Section 3E of the Exchange Act instead of an account 
established in accordance with Section 4d(f) of the CEA.\42\ Another 
commenter also stated that granting the petition now would not prohibit 
customers from later choosing a different portfolio margining option 
under a Section 3E account structure, if made available.\43\
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    \41\ See ICE Letter.
    \42\ Id.
    \43\ See MFA Letter.
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    The Commission appreciates the benefits of providing relief to 
facilitate portfolio margining now while maintaining discretion for 
customers to later choose a different portfolio

[[Page 75216]]

margining option under a Section 3E account structure when it becomes 
available. The Commission believes that it is important to ultimately 
provide market participants with the ability to select an account 
structure to manage their individual risks by taking into account the 
different regulatory provisions that may apply to different accounts 
types and that any costs incurred in providing such an option would be 
based on existing obligations that clearing agencies and markets 
participants have under Section 3E of the Exchange Act in connection 
with the clearing of security-based swaps in accordance with Section 3E 
of the Exchange Act. Accordingly, the Commission is imposing these two 
conditions in order to facilitate the ability of customers to choose an 
alternative account option in the future, once the Commission adopts 
final margin and segregation rules for security-based swaps.\44\
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    \44\ The choice of the type of portfolio margining account 
structure (i.e., security account or swap account) would be made by 
each intermediary (i.e., BD/FCM) for the benefit of its customers, 
while the clearing agency would be expected to maintain the capacity 
to allow the intermediary, acting as a clearing member, to select 
either option. This optionality also will further efforts to achieve 
more fully the benefits of risk-based portfolio margining, by giving 
to customers the choice of portfolio margining in a single futures 
or securities account at a dually-registered BD/FCM. See A Joint 
Report of the SEC and the CFTC on Harmonization of Regulation (Oct. 
19, 2009) ``Joint Report''.
---------------------------------------------------------------------------

    The third condition requires the clearing agency/DCO to have 
obtained any other relief needed to permit a BD/FCM that is a clearing 
member (at the BD/FCM's election) to maintain customer money, 
securities, and property received by the BD/FCM to margin, guarantee, 
or secure customer positions in cleared CDS, which include both swaps 
and security-based swaps, in a segregated account established and 
maintained in accordance with Section 4d(f) of the CEA and rules 
thereunder for the purpose of clearing (as a clearing member of the 
clearing agency/DCO) such customer positions under a program to 
commingle and portfolio margin CDS. The conditional exemptions from the 
requirements under the Exchange Act are based in part on the 
applicability of the regulatory regime under the CEA. This condition is 
designed to help ensure the exemption from the Exchange Act regulatory 
framework would apply only in circumstances where the regulatory regime 
under the CEA is applicable.
    The fourth condition requires the clearing agency/DCO to have 
appropriate rules and operational practices to permit a BD/FCM that is 
a clearing member (at the BD/FCM's election) to maintain customer 
money, securities, and property received by the BD/FCM to margin, 
guarantee, or secure customer positions in cleared CDS, which include 
both swaps and security-based swaps, in a segregated account 
established and maintained in accordance with Section 4d(f) of the CEA 
and rules thereunder for the purpose of clearing (as a clearing member 
of the clearing agency/DCO) such customer positions under a program to 
commingle and portfolio margin CDS. Similar to the prior condition, 
this condition is designed to help ensure the exemption from the 
Exchange Act regulatory framework would apply only in circumstances 
where the regulatory regime under the CEA is applicable.
    The fifth condition requires the clearing agency/DCO to have rules 
mandating that each customer of the BD/FCM participating in a program 
to commingle and portfolio margin CDS shall be an ``eligible contract 
participant'' as defined in Section 1a(18) of the CEA. Persons that are 
not eligible contract participants may lack the expertise or resources 
to effectively determine the risks associated with engaging in these 
types of transactions.\45\ Accordingly, the Commission believes it is 
appropriate to provide conditions that would limit the applicability of 
the exemptions to customers that are eligible contract participants.
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    \45\ The Dodd-Frank Act limits the swaps and security-based swap 
transactions that may be entered into by parties that are not 
eligible contract participants. For example, under the Dodd-Frank 
Act, only an eligible contract participant may enter into security-
based swaps that are not on a national securities exchange. See 
Exchange Act Section 6(l), 15 U.S.C. 78f(l) (added by Section 763(e) 
of the Dodd-Frank Act). In addition, security-based swaps that are 
not registered pursuant to the Securities Act of 1933 (``Securities 
Act'') can only be sold to eligible contract participants. See 
Securities Act Section 5(d), 15 U.S.C. 77e(d) (added by Section 
768(b) of the Dodd-Frank Act). Securities Act Section 5(d) 
specifically provides that it is unlawful to offer to buy, purchase, 
or sell a security-based swap to any person that is not an eligible 
contract participant, unless the transaction is registered under the 
Securities Act. Id. Given that Congress determined it is appropriate 
to include these limitations in the Dodd-Frank Act with respect to 
eligible contract participants, we believe it is appropriate to 
limit the exemptions in this Order to CDS entered into with eligible 
contract participants.
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D. Conditional Exemption for BD/FCMs That Elect To Offer a Program To 
Commingle and Portfolio Margin Customer Positions in CDS in Customer 
Accounts Maintained in Accordance With Section 4d(f) of the CEA and 
Rules Thereunder

    As summarized above, the Commission is issuing an exemption to BD/
FCMs from Exchange Act Sections 3E(b), (d), and (e), and Section 
15(c)(3) and Rule 15c3-3 thereunder, as well as an exemption from any 
requirement to treat an affiliate (as defined in association with the 
definition of ``Cleared Swaps Proprietary Account'' pursuant to CFTC 
Rule 22.1) \46\ as a customer for purposes of Exchange Act Rules 8c-1 
and 15c2-1, provided that the BD/FCM complies with the conditions to 
the exemption discussed below. This exemption is available to BD/FCMs 
solely to perform the functions of a BD/FCM for CDS with respect to any 
customer money, securities, and property received by the BD/FCM to 
margin, guarantee, or secure cleared customer positions in security-
based swaps included in a segregated account established and maintained 
in accordance with Section 4d(f) of the CEA and the rules thereunder 
under a program to commingle and portfolio margin customer positions in 
cleared CDS.
---------------------------------------------------------------------------

    \46\ 17 CFR 22.1. The definition of ``Cleared Swaps Proprietary 
Account'' was recently adopted by the CFTC and is substantially 
similar to the definition of ``Proprietary Account'' for futures 
contracts in regulation 1.3. See Protection of Cleared Swaps 
Customer Contracts and Collateral; Conforming Amendments to the 
Commodity Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012).
---------------------------------------------------------------------------

    The exemption is subject to six conditions that are designed to 
permit such BD/FCMs to participate in a program to commingle and 
portfolio margin customer positions in cleared CDS while helping to 
ensure the protection of customer securities and funds. The first two 
conditions of this exemption relate to the segregation of customer 
positions in CDS and impose separate requirements for customers that 
are not affiliates of the BD/FCM and customers that are affiliates of 
the BD/FCM.\47\ The remaining conditions apply generally to all BD/FCMs 
participating in the program--regardless of whether they deal with 
customers that are affiliates of the BD/FCM--and relate to the risk 
management and other safeguards the BD/FCM must have in place in order 
to rely on the exemption. Among other things, these conditions

[[Page 75217]]

establish minimum margin levels and disclosure requirements.
---------------------------------------------------------------------------

    \47\ ``Customer'' for purposes of this exemption has the same 
meaning as in Exchange Act Rules 15c2-1 and 8c2-1.
---------------------------------------------------------------------------

    The first condition consists of two requirements and applies with 
respect to transactions involving customers that are not affiliates 
\48\ of the BD/FCM.
---------------------------------------------------------------------------

    \48\ See supra notes 31 and 32 and accompanying text.
---------------------------------------------------------------------------

    First, the BD/FCM must maintain customer money, securities, and 
property received to margin, guarantee or secure customer positions 
consisting of cleared CDS, which include both swaps and security-based 
swaps, in a segregated account established and maintained in accordance 
with Section 4d(f) of the CEA and rules thereunder for the purpose of 
clearing (as a clearing member or through a clearing member of a 
clearing agency/DCO operating pursuant to the exemption in this Order) 
such customer positions under a program to commingle and portfolio 
margin CDS. This condition is designed to help ensure that the 
exemption under this Order would apply only in circumstances where 
customer money, securities, and property are maintained in a segregated 
account pursuant to the regulatory regime under the CEA.
    Second, the BD/FCM must enter into a non-conforming subordination 
agreement \49\ with each customer that is not an affiliate regarding 
all customer money, securities, or property held in a segregated 
account established and maintained in accordance with Section 4d(f) of 
the CEA and rules thereunder under a program to commingle and portfolio 
margin CDS. The non-conforming subordination agreement must contain: 
(i) A specific acknowledgment by the customer that such money, 
securities or property will not receive customer treatment under the 
Exchange Act or Securities Investor Protection Act of 1970 (``SIPA'') 
or be treated as customer property as defined in 11 U.S.C. 741 in a 
liquidation of the BD/FCM, and that such money, securities or property 
will be subject to any applicable protections under Subchapter IV of 
Chapter 7 of Title 11 of the United States Code and rules and 
regulations thereunder; and (ii) an affirmation by the customer that 
all of its claims with respect to such money, securities, or property 
against the BD/FCM will be subordinated to the claims of other 
securities customers and security-based swaps customers not operating 
under a program to commingle and portfolio margin CDS pursuant to this 
Order. The Commission believes that this condition, along with the 
disclosure conditions discussed below, should help to ensure that 
customers clearly understand that any customer protection treatment 
otherwise available with respect to securities transactions under the 
Exchange Act, SIPA or the stockbroker liquidation provisions will not 
be available for CDS held in an account maintained in accordance with 
Section 4d(f) of the CEA.
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    \49\ The term ``non-conforming subordination agreement'' is used 
broadly to refer to a subordination agreement between a broker-
dealer and its client where the client agrees to subordinate its 
claims to the claims of all customers and other creditors of the 
broker-dealer. Non-conforming subordination agreements have 
previously been used in limited circumstances to permit broker-
dealer affiliates to be treated as non-customers for purposes of 
Exchange Act Rule 15c3-3 to allow the positions of the affiliate to 
be commingled with the positions of the clearing member. See, e.g., 
Letter from Michael A. Macchiaroli, Associate Director, Division of 
Market Regulation, to William H. Navin, EVP and General Counsel, The 
Options Clearing Corporation (June 15, 2000). See also Statement of 
the SEC Division of Trading and Markets Regarding the Protection of 
Customer Assets, Sept. 20, 2008 (available at http://www.sec.gov/news/press/2008/2008-216.htm).
---------------------------------------------------------------------------

    One commenter similarly requested clarity about how CDS commingled 
in a Section 4d(f) account would be treated in the event of the 
bankruptcy of a BD/FCM.\50\ The commenter requested that the Commission 
and the CFTC clarify and confirm in any approval of ICE Clear Credit's 
request for relief that commingled accounts held in accordance with the 
segregation requirements of Section 4d(f) of the CEA would be a cleared 
swaps customer account for customers trading swaps and would be treated 
as such under the Bankruptcy Code (rather than a securities account 
subject to SIPA).\51\ The Commission believes it is critical for the 
protection of customer's assets to clarify at the outset the rights of 
customers, generally, in the event of a bankruptcy of the BD/FCM, and 
believes that the subordination agreement condition discussed herein, 
in conjunction with disclosure condition described below, should help 
provide customers with clarity that the segregation requirements of the 
Exchange Act and any protections of SIPA and the stockbroker 
liquidation provisions will not apply to customer positions in CDS that 
are security-based swaps and are held in a Section 4d(f) account.\52\
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    \50\ See ICI Letter.
    \51\ Id.
    \52\ In response to statements in the ICE Letter regarding what 
occurs when there is a shortfall in customer property in a broker-
dealer bankruptcy or SIPA liquidation versus an FCM bankruptcy, the 
Commission notes that SIPA provide protections to customers that 
give them priority over general creditors. See Joint Report, supra, 
note 44, at 39-40. First, in the case of a shortfall in customer 
property held by a broker-dealer, SIPA and the stockbroker 
liquidation provisions of the Bankruptcy Code provide that customer 
property may be supplemented with other property in certain 
circumstances. See 15 U.S.C. 78lll(4)(E); 15 U.S.C. 78fff-2(c)(3); 
11 U.S.C. 741(4)(A)(iv); and 11 U.S.C. 749. In a SIPA liquidation, 
to the extent customer property and SIPC advances (up to $500,000 
per customer, including a maximum of $250,000 for cash claims) are 
not sufficient to pay or otherwise satisfy in full the net equity 
claims of customers, such customers are entitled, to the extent only 
of their respective unsatisfied net equities, to participate in the 
general estate as unsecured creditors.
    In response to statements in the ICE Letter that the SIPA 
insolvency rules do not appear to provide assurances for a prompt 
liquidation, the Commission notes that SIPA and Commission 
regulations contemplate expeditious transfer of customer accounts 
through self-liquidation or a proceeding under SIPA. In general, if 
the books and records of the broker-dealer are in order and customer 
accounts are properly margined, customer accounts may be transferred 
to another broker-dealer in a process known as a bulk transfer. See 
Joint Report, supra, note 44, at 40.
---------------------------------------------------------------------------

    The second condition applies with respect to transactions involving 
customers that are affiliates of the BD/FCM and consists of three 
requirements.
    First, the BD/FCM must maintain affiliate money, securities, and 
property received to margin, guarantee, or secure positions consisting 
of cleared CDS, which include both swaps and security-based swaps, in a 
Cleared Swaps Proprietary Account for the purpose of clearing (as a 
clearing member of a clearing agency/DCO operating pursuant to the 
exemption in this Order) such positions under a program to commingle 
and portfolio margin CDS. The purpose of this requirement is to ensure 
that a program to commingle and portfolio margin CDS will conform to 
the regulatory regime of the CFTC, under which certain affiliates are 
not treated as customers.\53\ Specifically, the money, securities, and 
property of a customer that is an affiliate of the BD/FCM must be held 
in a Cleared Swaps Proprietary Account in accordance with the CFTC 
regime.\54\
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    \53\ Under CFTC regulations, an account in which Cleared Swaps 
and associated collateral of applicable affiliates of an FCM are 
held is classified as a proprietary account. See 17 CFR 22.1. As 
previously noted, the Commission believes the relief being provided 
with respect to affiliates of a BD/FCM is appropriate because absent 
an exemption, affiliates of a BD/FCM that are not otherwise excluded 
from the definition of customer in the hypothecation rules (i.e., 
Exchange Act Rules 8c-1 and 15c2-1) are customers whose securities 
positions cannot be commingled with the broker-dealer's own 
proprietary securities positions and therefore could not be held in 
Cleared Swap Proprietary Account as required under the CFTC regime.
    \54\ The Commission has previously granted similar relief to 
non-broker-dealer affiliates of members of a registered clearing 
agency. See Letter from Michael A. Macchiaroli, Associate Director, 
Division of Market Regulation, to William H. Navin, EVP and General 
Counsel, The Options Clearing Corporation (June 15, 2000). The no-
action relief included terms that required each non-broker-dealer 
member affiliate whose securities positions would be hypothecated to 
consent to being treated as a non-customer and to execute a non-
conforming subordination agreement meeting certain criteria 
accompanied by an opinion of counsel regarding the legal authority 
of the member affiliate to so subordinate its claims. In connection 
with the no action relief, the Commission approved a proposed rule 
change filed by OCC to allow an affiliate of an OCC clearing member 
to designate itself as a non-customer under the Commission's 
hypothecation rules and OCC's By-Laws and Rules in order for the 
affiliate's transactions and positions to be commingled in its 
clearing member's firm and/or proprietary cross-margin account. See 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of Proposed Rule Change Relating to Clearing 
Member Affiliates, Exchange Act Release No. 43668 (Dec. 4, 2000), 65 
FR 77413 (Dec. 11, 2000).

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[[Page 75218]]

    Second, the BD/FCM must enter into a non-conforming subordination 
agreement \55\ with each affiliate regarding all customer money, 
securities, or property held in a segregated account established and 
maintained in accordance with Section 4d(f) of the CEA and rules 
thereunder under a program to commingle and portfolio margin CDS. The 
non-conforming subordination agreement must contain: (i) A specific 
acknowledgment by the affiliate that such money, securities or property 
will not receive customer treatment under the Exchange Act or SIPA or 
be treated as customer property as defined in 11 U.S.C. 741 in a 
liquidation of the BD/FCM, and that such money, securities or property 
will be held in a proprietary account in accordance with the CFTC 
requirements and will be subject to any applicable protections under 
Subchapter IV of Chapter 7 of Title 11 of the United States Code and 
rules and regulations thereunder; and (ii) an affirmation by the 
affiliate that all of its claims with respect to such money, 
securities, or property against the BD/FCM will be subordinated to the 
claims of other securities customers and security-based swap customers 
not operating under a program to commingle and portfolio margin CDS 
pursuant to this Order. The Commission believes that this requirement 
should help to ensure that affiliates clearly understand that any 
customer protection treatment otherwise available with respect to 
securities transactions under the Exchange Act, SIPA or the stockbroker 
liquidation provisions will not be available and the account would be 
treated as a proprietary account (and not a customer account) under the 
CEA.
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    \55\ Under Exchange Act Rule 15c3-1, a broker-dealer can exclude 
from its liabilities a subordinated loan that has been approved by 
its designated examining authority (``DEA'') for purposes 
determining its net capital. See 17 CFR 240.15c3-1(c)(2)(ii) and 
15c3-1d. A non-conforming subordinated loan is one that the DEA has 
not approved and, therefore, cannot be used to exclude the liability 
arising from the loan agreement. See Letter from Michael A. 
Macchiaroli, Associate Director, Division of Market Regulation, to 
William H. Navin, EVP and General Counsel, The Options Clearing 
Corporation (June 15, 2000).
---------------------------------------------------------------------------

    Third, the BD/FCM must obtain from the affiliate an opinion of 
counsel that the affiliate is legally authorized to subordinate all of 
its claims against the BD/FCM to those of other customers. The 
Commission believes that this condition is appropriate to help ensure 
that affiliates of the BD/FCM do not place in a proprietary account any 
assets that the affiliate is not legally authorized to subordinate.
    The remaining conditions are applicable generally to all BD/FCMs 
operating pursuant to the exemption in this Order, regardless of 
whether they deal with customers that are affiliates of the BD/FCM.
    The third condition to this exemption states that the BD/FCM must 
set minimum margin levels, with respect to any customer transaction in 
a program to commingle and portfolio margin CDS, at least equal to the 
amount determined using a margin methodology established and maintained 
by the BD/FCM that has been approved in writing by the Commission or 
the Commission staff. In conducting this review function, the 
Commission intends that the Commission staff will consult with the CFTC 
staff and take into consideration the margin methodology used by the 
clearing agency/DCO in setting customer margin levels under the CFTC 
risk management regulations.\56\ This condition is designed to help 
assure that consistent customer margin requirements apply to the BD/
FCM, regardless of the type of account in which a security (including 
security-based swap) is held, and that the BD/FCM is requiring minimum 
margin that adequately measures the risk in the customer's CDS 
portfolio in a manner consistent with its appropriate internal risk 
management procedures.\57\ This approach will promote the establishment 
of consistent margin levels for securities across account types, which 
in turn will mitigate the risk that clearing agency/DCOs will compete 
by implementing lower margin levels and help ensure that margin levels 
are set at sufficiently prudent levels to reduce systemic risk. 
Finally, the Commission intends that the Commission staff will work 
with the CFTC staff to see that trading under the program will 
facilitate both capital efficiency and prudent risk management.
---------------------------------------------------------------------------

    \56\ See 17 CFR 39.13 (CFTC risk management regulations 
applicable to DCOs). In appropriate circumstances, the Commission or 
the Commission staff may provide temporary approval of a BD/FCM's 
margin methodology while the methodology is still being evaluated 
prior to granting final approval.
    \57\ Nothing in this Order will preclude an FCM from setting a 
higher margin level for some or all of its customers. See 17 CFR 
39.13(g)(8).
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    A BD/FCM seeking approval for a margin methodology would be 
expected to submit sufficient information for the Commission or 
Commission staff \58\ to be able to make a determination regarding the 
performance of the firm's margin methodology.\59\ In reviewing this 
information, the Commission or the Commission staff will be guided by 
the standards prescribed in Appendix E of Exchange Act Rule 15c3-1, to 
the extent relevant to the portfolio margining of cleared CDS that are 
swaps and security-based swaps.\60\ In reviewing the BD/FCM's submitted 
margin methodology, we expect that the Commission or Commission staff 
would consider, among other things, whether the type and amount of 
securities permitted to be held for margin purposes are restricted to 
those which would facilitate the portfolio margining program and 
whether the BD/FCM's VaR model meets the standards set forth in 
Appendix E to Exchange Act Rule 15c3-1, as applicable.\61\ In cases 
where a BD/FCM proposes to use a standardized, rather than model-based, 
methodology, the Commission or Commission staff would consider whether 
the methodology could be expected to be at least as conservative in 
setting margin amounts as a model meeting the requirements just 
described.
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    \58\ The Commission expects and intends that the Financial 
Industry Regulatory Authority (``FINRA'') will be actively involved 
in reviewing risk management systems and procedures, including 
margin methodologies, used by BD/FCMs seeking to participate in the 
program. FINRA has a defined and vital interest in seeing that its 
members use portfolio margining arrangements involving securities, 
including security-based swaps, in a manner that is prudent and 
fully accounts for all the risks that they incur in connection with 
such arrangements.
    \59\ If a BD/FCM's margin methodology is approved for purposes 
of this exemption, the performance of the methodology would be 
subject to ongoing regulatory supervision, and the BD/FCM would be 
expected to submit for approval any material changes to its margin 
methodology.
    \60\ See generally 17 CFR 240.15c3-1e(a). Information submitted 
as part of such application shall be accorded confidential 
treatment, subject to provisions of applicable law.
    \61\ The amount and type of securities held for margin purposes 
should be commensurate with the risk and activity contained in the 
portfolio margining program and must not be designed to evade the 
requirements generally applicable to securities pursuant to Exchange 
Act Rule 15c3-3.
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    By conducting this review, the Commission will be approving margin 
methodologies for customer positions in securities as well as non-
securities held in a portfolio margin account. Due to the nature of 
portfolio margining, in which

[[Page 75219]]

the margin methodology is applied to all positions in an account as a 
single portfolio, security-based swaps cannot be singled out for margin 
treatment that differs from the treatment applied to swaps. This order 
by its terms does not apply to, and the Commission is not seeking to 
establish margin requirements with respect to, accounts that hold no 
positions in security-based swaps.
    The fourth condition requires that the BD/FCM be in compliance with 
applicable laws and regulations relating to risk management, capital, 
and liquidity, and be in compliance with applicable clearing agency/DCO 
rules and CFTC requirements (including segregation and related books 
and records provisions) for accounts established and maintained in 
accordance with Section 4d(f) of the CEA and rules thereunder and 
subject to a program to commingle and portfolio margin CDS. The purpose 
of this condition is to help assure that the exemption under this Order 
is available only where the applicable regulatory requirements are 
appropriately followed.
    The fifth condition requires that each customer of the BD/FCM 
participating in a program to commingle and portfolio margin CDS be an 
``eligible contract participant'' as defined in Section 1a(18) of the 
CEA. Similar to the condition under the exemption for clearing 
agencies/DCOs, the Commission believes that it is appropriate to limit 
the availability of this exemption to eligible contract participants, 
as persons that are not eligible contract participants may lack the 
expertise or resources to effectively determine the risks associated 
with engaging in these types of transactions.
    The sixth and final condition requires that, before receiving any 
money, securities, or property of a customer to margin, guarantee, or 
secure positions consisting of cleared CDS, which include both swaps 
and security-based swaps, under a program to commingle and portfolio 
margin CDS, the BD/FCM must furnish to the customer a disclosure 
document containing (i) a statement indicating that the customer's 
money, securities, and property will be held in an account maintained 
in accordance with the segregation requirements of Section 4d(f) of the 
CEA and that the customer has elected to seek protections under 
Subchapter IV of Chapter 7 of Title 11 of the United States Code and 
the rules and regulations thereunder with respect to such money, 
securities, and property, and (ii) a statement that the broker-dealer 
segregation requirements of Section 15(c)(3) and Section 3E of the 
Exchange Act and the rules thereunder, and any customer protections 
under SIPA and the stockbroker liquidation provisions, will not apply 
to such customer money, securities, and property. The disclosure 
document may be provided to a customer at or prior to the time that the 
customer opens an account to commingle and portfolio margin CDS 
positions in accordance with Section 4d(f) of the CEA, but must be 
provided prior to the BD/FCM receiving any money, securities or 
property to margin, guarantee or secure positions consisting of cleared 
CDS, which include both swaps and security-based swaps, under a program 
to commingle and portfolio margin CDS. The Commission believes that 
this condition will help to provide market participants that elect to 
participate in a portfolio margining arrangement, as contemplated under 
this Order, with important disclosures regarding the legal framework 
that will govern their transactions. As noted above, the Commission 
views the disclosure requirements as essential to highlight to 
customers who elect to commingle and portfolio margin their positions 
in CDS in accounts maintained in accordance with Section 4d(f) of the 
CEA that the account will be governed by the segregation requirements 
under the CFTC's regulatory regime and that any protections under the 
SIPA will not be available to the account in the event of 
insolvency.\62\
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    \62\ See supra note 52 and associated text.
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III. Solicitation of Comments

    The Commission requests comment on this exemption for clearing 
agencies/DCOs and BD/FCMs. The Commission is soliciting public comment 
on all aspects of this exemption, including whether other conditions 
should apply. If so, what conditions and why?

IV. Conclusion

    It is hereby ordered, pursuant to Section 3E(c)(2) and Section 
36(a) of the Exchange Act, the following exemptions from Exchange Act 
requirements will apply:
    (a) Exemption for dually registered clearing agencies/derivatives 
clearing organizations. A clearing agency registered pursuant to 
Section 17A of the Exchange Act and registered as a derivatives 
clearing organization pursuant to Section 5b of the CEA (a ``clearing 
agency/DCO'') shall be exempt from Sections 3E(b), (d), and (e) of the 
Exchange Act and any rules thereunder, solely to perform the functions 
of a clearing agency for CDS under a program to commingle and portfolio 
margin cleared CDS for customer positions, subject to the following 
conditions:
    (1) The clearing agency/DCO, by the later of (i) six months after 
the adoption date of final rules setting forth margin and segregation 
requirements applicable to security-based swaps consistent with Section 
3E of the Exchange Act or (ii) the compliance date of such rules, takes 
all necessary action within its control to obtain any relief needed to 
permit its clearing members that are registered under Section 15(b) of 
the Exchange Act (other than paragraph (11) thereof) and also 
registered as a futures commission merchant pursuant to Section 
4f(a)(1) of the CEA (a ``BD/FCM'') (at the BD/FCM's election), to 
maintain customer money, securities, and property received by the BD/
FCM to margin, guarantee, or secure customer positions in cleared CDS, 
which include both swaps (as defined in Section 1(a)(47) of the CEA and 
the rules thereunder) and security-based swaps (as defined in Section 
3(g)(68) of the Exchange Act and the rules thereunder), in a segregated 
account established and maintained in accordance with Section 3E of the 
Exchange Act and any rules thereunder for the purpose of clearing (as a 
clearing member of the clearing agency/DCO) such customer positions 
under a program to commingle and portfolio margin CDS.
    (2) The clearing agency/DCO, by the later of (i) six months after 
the adoption date of final rules setting forth margin and segregation 
requirements applicable to security-based swaps consistent with Section 
3E of the Exchange Act or (ii) the compliance date of such rules, takes 
all necessary action within its control to establish rules and 
operational practices to permit a BD/FCM (at the BD/FCM's election) to 
maintain customer money, securities, and property received by the BD/
FCM to margin, guarantee, or secure customer positions in cleared CDS, 
which include both swaps and security-based swaps, in a segregated 
account established and maintained in accordance with Section 3E of the 
Exchange Act and any rules thereunder for the purpose of clearing (as a 
clearing member of the clearing agency/DCO) such customer positions 
under a program to commingle and portfolio margin CDS. Until such rules 
and operational practices have been developed, pursuant to the clearing 
agency/DCO's rules, clearing members that are BD/FCMs must maintain 
customer money, securities, and property received to margin, guarantee, 
or secure customer positions consisting of cleared CDS, which include 
both

[[Page 75220]]

swaps and security-based swaps, in a segregated account established and 
maintained in accordance with Section 4d(f) of the CEA and rules 
thereunder for the purpose of clearing (as a clearing member of the 
clearing agency/DCO) such customer positions under a program to 
commingle and portfolio margin CDS.
    (3) The clearing agency/DCO has obtained any other relief needed to 
permit a BD/FCM that is a clearing member (at the BD/FCM's election) to 
maintain customer money, securities, and property received by the BD/
FCM to margin, guarantee, or secure customer positions in cleared CDS, 
which include both swaps and security-based swaps, in a segregated 
account established and maintained in accordance with Section 4d(f) of 
the CEA and rules thereunder for the purpose of clearing (as a clearing 
member of the clearing agency/DCO) such customer positions under a 
program to commingle and portfolio margin CDS.
    (4) The clearing agency/DCO has appropriate rules and operational 
practices to permit a BD/FCM that is a clearing member (at the BD/FCM's 
election) to maintain customer money, securities, and property received 
by the BD/FCM to margin, guarantee, or secure customer positions in 
cleared CDS, which include both swaps and security-based swaps, in a 
segregated account established and maintained in accordance with 
Section 4d(f) of the CEA and rules thereunder for the purpose of 
clearing (as a clearing member of the clearing agency/DCO) such 
customer positions under a program to commingle and portfolio margin 
CDS.
    (5) The rules of the clearing agency/DCO require that each customer 
of the BD/FCM participating in a program to commingle and portfolio 
margin CDS shall be an ``eligible contract participant'' as defined in 
Section 1a(18) of the CEA.
    (b) Exemption for certain BD/FCMs that elect to offer a program to 
commingle and portfolio margin customer positions in CDS in customer 
accounts maintained in accordance with Section 4d(f) of the CEA and 
rules thereunder.

Solely to perform the functions of a BD/FCM for cleared CDS, with 
respect to any customer money, securities, and property received by the 
BD/FCM to margin, guarantee, or secure customer positions in security-
based-swaps included in a segregated account established and maintained 
in accordance with Section 4d(f) of the CEA and rules thereunder under 
a program to commingle and portfolio margin customer positions in CDS, 
a BD/FCM shall be exempt from Exchange Act Sections 3E(b), (d), and 
(e), and Section 15(c)(3) and Rule 15c3-3 thereunder and any 
requirement to treat an affiliate (as defined in association with the 
definition of ``Cleared Swaps Proprietary Account'' pursuant to CFTC 
Rule 22.1) as a customer for purposes of Exchange Act Rules 8c-1 and 
15c2-1, subject to the following conditions:

    (1) With respect to customers that are not affiliates of the BD/
FCM,
    (i) the BD/FCM shall maintain customer money, securities, and 
property received to margin, guarantee or secure customer positions 
consisting of cleared CDS, which include both swaps and security-based 
swaps, in a segregated account established and maintained in accordance 
with Section 4d(f) of the CEA and rules thereunder for the purpose of 
clearing (as a clearing member or through a clearing member of a 
clearing agency/DCO operating pursuant to the exemption in paragraph 
(a) above) such customer positions under a program to commingle and 
portfolio margin CDS; and
    (ii) the BD/FCM shall enter into a non-conforming subordination 
agreement with each customer. The agreement must contain a specific 
acknowledgment by the customer that such money, securities or property 
will not receive customer treatment under the Exchange Act or SIPA or 
be treated as customer property as defined in 11 U.S.C. 741 in a 
liquidation of the BD/FCM and that such money, securities or property 
will be subject to any applicable protections under Subchapter IV of 
Chapter 7 of Title 11 of the United States Code and rules and 
regulations thereunder; as well as an affirmation by the customer that 
all of its claims with respect to such money, securities, or property 
against the BD/FCM will be subordinated to the claims of other 
securities customers and security-based swap customers not operating 
under a program to commingle and portfolio margin CDS pursuant to this 
Order.
    (2) With respect to customers that are affiliates of the BD/FCM,
    (i) The BD/FCM maintains money, securities, and property of 
affiliates received to margin, guarantee, or secure positions 
consisting of cleared CDS, which include both swaps and security-based 
swaps, in a Cleared Swaps Proprietary Account for the purpose of 
clearing (as a clearing member of a clearing agency/DCO operating 
pursuant to the exemption in paragraph (a) above) such positions under 
a program to commingle and portfolio margin CDS;
    (ii) The BD/FCM enters into a non-conforming subordination 
agreement with each affiliate. The agreement must contain a specific 
acknowledgment by the affiliate that such money, securities or property 
will not receive customer treatment under the Exchange Act or SIPA or 
be treated as customer property as defined in 11 U.S.C. 741 in a 
liquidation of the BD/FCM, and that such money, securities or property 
will be held in a proprietary account in accordance with the CFTC 
requirements and will be subject to any applicable protections under 
Subchapter IV of Chapter 7 of Title 11 of the United States Code and 
rules and regulations thereunder; as well as an affirmation by the 
affiliate that all of its claims with respect to such money, 
securities, or property against the BD/FCM will be subordinated to the 
claims of other securities customers and security-based swap customers 
not operating under a program to commingle and portfolio margin CDS 
pursuant to this Order; and
    (iii) The BD/FCM obtains from the affiliate an opinion of counsel 
that the affiliate is legally authorized to subordinate all of its 
claims against the BD/FCM to those of customers.
    (3) The BD/FCM requires minimum margin levels with respect to any 
customer transaction in a program to commingle and portfolio margin CDS 
at least equal to the amount determined using a margin methodology 
established and maintained by the BD/FCM that has been approved by the 
Commission or the Commission staff.
    (4) The BD/FCM must be in compliance with applicable laws and 
regulations relating to risk management, capital, and liquidity, and 
shall be in compliance with applicable clearing agency/DCO rules and 
CFTC requirements (including segregation and related books and records 
provisions) for accounts established and maintained in accordance with 
Section 4d(f) of the CEA and rules thereunder and subject to a program 
to commingle and portfolio margin CDS.
    (5) Each customer of the BD/FCM participating in a program to 
commingle and portfolio margin CDS is an ``eligible contract 
participant'' as defined in Section 1a(18) of the CEA.
    (6) Before receiving any money, securities, or property of a 
customer to margin, guarantee, or secure positions consisting of 
cleared CDS, which include both swaps and security-based swaps, under a 
program to commingle and portfolio margin CDS, the BD/FCM must furnish 
to the customer a disclosure document containing the following 
information:

[[Page 75221]]

    (i) a statement indicating that the customer's money, securities, 
and property will be held in an account maintained in accordance with 
the segregation requirements of Section 4d(f) of the CEA and that the 
customer has elected to seek protections under Subchapter IV of Chapter 
7 of Title 11 of the United States Code and the rules and regulations 
thereunder with respect to such money, securities, and property; and
    (ii) a statement that the broker-dealer segregation requirements of 
Section 15(c)(3) and Section 3E of the Exchange Act and the rules 
thereunder, and any customer protections under SIPA and the stockbroker 
liquidation provisions, will not apply to such customer money, 
securities, and property.

V. Paperwork Reduction Act

    Certain provisions of this Order contain ``collection of 
information requirements'' within the meaning of the Paperwork 
Reduction Act of 1995.\63\ The Commission has submitted this Order to 
the Office of Management and Budget (``OMB'') for review in accordance 
with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number.
---------------------------------------------------------------------------

    \63\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Collection of Information

    The Commission found it necessary or appropriate in the public 
interest and consistent with the protection of investors to grant the 
conditional exemptions discussed in this Order. Among other things, the 
Order would require BD/FCMs that elect to offer a program to commingle 
and portfolio margin customer positions in CDS in customer accounts 
maintained in accordance with Section 4d(f) of the CEA and rules 
thereunder, to obtain certain agreements and opinions from its 
customers regarding the applicable regulatory regime, and to make 
certain disclosures to its customers before receiving any money, 
securities, or property of a customer to margin, guarantee, or secure 
positions consisting of cleared CDS, which include both swaps and 
security-based swaps, under a program to commingle and portfolio margin 
CDS. The Order would also require BD/FCMs that elect to offer a program 
to commingle and portfolio margin CDS positions in customer accounts 
maintained in accordance with Section 4d(f) of the CEA and rules 
thereunder, to maintain minimum margin levels using a margin 
methodology approved by the Commission or the Commission staff.

B. Proposed Use of Information

    The collection of information requirements are designed, among 
other things, to provide appropriate agreements, disclosures, and 
opinions to BD/FCM customers to clarify key aspects of the regulatory 
framework that will govern their participation in a program to 
commingle and portfolio margin CDS positions and to ensure that 
appropriate levels of margin are collected.

C. Respondents

    The collections of information as required by this Order would 
apply to those BD/FCMs that are seeking to offer a program to commingle 
and portfolio margin customer positions in CDS in customer accounts 
maintained in accordance with Section 4d(f) of the CEA. Based on 
conversations with industry participants and the Commission's market 
oversight experience, the Commission estimates that approximately 57 
firms would be likely to participate in the CDS market in the 
future.\64\ Consequently, the Commission estimates that approximately 
57 firms may seek to avail themselves of the conditional exemptive 
relief provided in this Order.
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    \64\ Based on a review of FOCUS reports filed with the 
Commission there are approximately 57 broker-dealers that also 
completed the Commodity Futures Account segregation page on the 
FOCUS report and therefore would be BD/FCMs. The Commission is 
assuming that all 57 BD/FCMs would be likely to participate in the 
CDS market. In addition, the Commission notes it had previously 
estimated that approximately 50 entities may fit within the 
definition of security-based swap dealer (``SBSD'') and up to 5 
entities may fit within the definition of major security-based swap 
participant (``MSBSP''). See Registration of Security-Based Swap 
Dealers and Major Security-Based Swap Participants, Exchange Act 
Release No. 65543 (Oct. 12, 2011), 76 FR 65784 (Oct. 24, 2011), at 
65808. The Commission believes that the number of BD/FCMs likely to 
engage in the CDS business would be approximately equal to the 
previously estimated number of security-based swap dealers and major 
security-based swap participants given that CDS make up a 
significant portion of the current security-based swap market.
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D. Total Annual Reporting and Recordkeeping Burden

    Paragraph IV(b)(1)(ii) of this Order applies with respect to 
customers that are not affiliates of the BD/FCM and requires BD/FCMs 
that elect to offer a program to commingle and portfolio margin 
customer positions in CDS in customer accounts maintained in accordance 
with Section 4d(f) of the CEA and rules thereunder to enter into a non-
conforming subordination agreement with the non-affiliate customer. The 
non-conforming subordination agreement must contain: (i) A specific 
acknowledgment by the customer that such money, securities or property 
will not receive customer treatment under the Exchange Act or SIPA or 
be treated as customer property as defined in 11 U.S.C. 741 in a 
liquidation of the BD/FCM and that such money, securities or property 
will be subject to any applicable protections under Subchapter IV of 
Chapter 7 of Title 11 of the United States Code and rules and 
regulations thereunder; and (ii) an affirmation by the customer that 
all of its claims with respect to such money, securities, or property 
against the BD/FCM will be subordinated to the claims of other 
securities customers and security-based swap customers not operating 
under a program to commingle and portfolio margin CDS pursuant to this 
Order.
    The Commission estimates that the average number of non-affiliate 
CDS customers of a BD/FCM to be approximately 1,000 \65\ and the 
average number of hours to develop a subordination agreement for each 
non-affiliate CDS customer to be approximately 20 hours. In addition, 
based on a consultation with industry representatives, the Commission 
estimates that each non-affiliate customer will do business with more 
than one BD/FCM, averaging out to 2.5 BD/FCMs per customer. 
Consequently, the Commission estimates the total one-time burden 
associated with this requirement to be 2,850,000 hours.\66\ In 
addition, because the BD/FCM would enter into these agreements with CDS 
customers, the Commission staff estimates that a BD/FCM would have 
outside counsel review a standard non-conforming subordination 
agreement and that the review would take approximately 100 hours at a 
cost of

[[Page 75222]]

approximately $400 per hour.\67\ As a result, the Commission staff 
estimates that each BD/FCM would incur one-time costs of approximately 
$40,000, resulting in an industry-wide one-time cost of approximately 
$2,280,000.\68\
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    \65\ This estimate is based on a previous estimate in the 
Capital Margin and Segregation Release that each of SBSD and MSBSP 
has 1,000 counterparties at any given time. See Capital, Margin, and 
Segregation Requirements Adopting Release. Commission staff believes 
that the number of counterparties of a SBSD or MSBSP may likely be 
equivalent to the number of customers of a BD/FCM that may 
participate in a portfolio margining program for customer positions 
in cleared CDS offered by the BD/FCM. However, as portfolio 
margining programs are not yet being offered for CDS customers, it 
is difficult to estimate with precision the number of customers that 
may participate in customer clearing of CDS. Furthermore, the number 
of customers that seek to clear CDS through a portfolio margining 
program may change after final mandatory clearing determinations are 
made with respect to various product types within CDS.
    \66\ 57 BD/FCMs x 1,000 non-affiliate customers per dealer x 2.5 
BD/FCMs used by each customer x 20 hours for each agreement.
    \67\ See PRA Analysis in Capital, Margin, and Segregation 
Requirements Adopting Release (providing an estimate of $400 an hour 
to engage an outside attorney).
    \68\ 57 BD/FCMs x 100 hours to review x $400 per hour.
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    Paragraph IV(b)(2)(ii) of this Order applies with respect to 
customers that are affiliates of the BD/FCM and requires BD/FCMs that 
elect to offer a program to commingle and portfolio margin customer 
positions in CDS in customer accounts maintained in accordance with 
Section 4d(f) of the CEA and rules thereunder to enter into a non-
conforming subordination agreement. The non-conforming subordination 
agreement must contain: (i) A specific acknowledgment by the affiliate 
that such money, securities or property will not receive customer 
treatment under the Exchange Act or SIPA or be treated as customer 
property as defined in 11 U.S.C. 741 in a liquidation of the BD/FCM, 
and that such money, securities or property will be held in a 
proprietary account in accordance with the CFTC requirements and will 
be subject to any applicable protections under Subchapter IV of Chapter 
7 of Title 11 of the United States Code and rules and regulations 
thereunder; and (ii) an affirmation by the affiliate that all of its 
claims with respect to such money, securities, or property against the 
BD/FCM will be subordinated to the claims of other securities customers 
and security-based swap customers not operating under a program to 
commingle and portfolio margin CDS pursuant to this Order. The 
Commission estimates that the average number of customers that are 
affiliates of the BD/FCM to be approximately 11 \69\ and the average 
number of hours to develop a subordination agreement for a non-
affiliate CDS customer to be approximately 20 hours based on the 
Commission's prior experiences with the development of subordination 
agreements.\70\ Consequently, the Commission estimates that the total 
one-time burden associated with this requirement to be 12,540 
hours.\71\ As stated previously, the Commission staff believes that a 
BD/FCM would have outside counsel review a standard non-conforming 
subordination agreement and that review would result in a one-time 
industry cost of $2,280,000. Because the same requirements and 
acknowledgements in the non-conforming subordination agreements with 
non-affiliate customers must be included in the non-conforming 
subordination agreements with affiliate customers (with an additional 
acknowledgement by the affiliate that its money, securities, or 
property will be held in a proprietary account in accordance with CFTC 
requirements), we believe that a BD/FCM would not need to engage an 
outside counsel to perform a review of a separate review of a standard 
non-conforming subordination agreement for affiliate customers.
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    \69\ FINRA CRD data indicate that the 17 largest broker-dealers 
(i.e., those with total assets of $50 billion or more) reported a 
total of 188 affiliates that are themselves registered with the SEC 
(i.e., they have their own CRD numbers), representing approximately 
11 affiliates per broker-dealer. The Commission believes that this 
would be a useful approximation of the average number of customers 
that are affiliates of the BD/FCM, as many affiliates of a BD/FCM 
that would seek to use portfolio margining are likely to be subject 
to some form of a registration requirement with the SEC. 
Furthermore, the assumption that all such registered affiliates 
would seek to engage in portfolio margining (when some may not) 
should help to offset any discrepancy associated with customers that 
are affiliates but would not be subject to an SEC registration 
requirement.
    \70\ The Commission has previously considered the development of 
subordination agreements in other contexts. See Letter from Michael 
A. Macchiaroli, Associate Director, Division of Market Regulation, 
to William H. Navin, EVP and General Counsel, The Options Clearing 
Corporation (June 15, 2000).
    \71\ 57 BD/FCMs x 11 affiliate customers x 20 hours.
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    Paragraph IV(b)(2)(iii) of this Order applies with respect to 
customers that are affiliates of the BD/FCM and requires BD/FCMs that 
elect to offer a program to commingle and portfolio margin customer 
positions in CDS in customer accounts maintained in accordance with 
Section 4d(f) of the CEA and rules thereunder to obtain from its 
affiliates an opinion of counsel that the affiliate is legally 
authorized to subordinate all of its claims against the BD/FCM to those 
of customers. Again, the Commission estimates that the average number 
of customers that are affiliates of the BD/FCM to be approximately 11 
and the average number of hours to develop the required opinion for an 
affiliate CDS customer to be approximately 2 hours.\72\ Consequently, 
the Commission estimates that the total one-time burden associated with 
this requirement to be 1,254 hours.\73\ The Commission staff also 
estimates that the BD/FCM will engage outside counsel to review a 
standard opinion of counsel and that the outside counsel would need 
approximately 20 hours at a cost of approximately $400 per hour. As a 
result, the Commission staff estimates that the BD/FCM would incur a 
one-time cost of approximately $8,000, resulting in an industry-wide 
one-time cost of approximately $456,000.\74\
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    \72\ This estimate is based on the Commission's currently 
approved Collection of Information Supporting Statement for Rule 
15c3-1 of the Exchange Act, which discusses obtaining an opinion of 
counsel as required by Appendix C to Rule 15c3-1 of the Exchange Act 
(available at http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201006-3235-004). The Commission believes that obtaining an 
opinion of counsel as required by this order will require additional 
time to adequately research the issue to provide an opinion of 
counsel and, therefore, has provided additional time in its 
estimation.
    \73\ 57 BD/FCMs x 11 affiliate customers x 2 hours.
    \74\ 57 BD/FCMs x 20 hours for outside counsel to review x $400 
per hour.
---------------------------------------------------------------------------

    Paragraph IV(b)(5) of this Order requires that BD/FCMs that elect 
to offer a program to commingle and portfolio margin customer positions 
in CDS in customer accounts maintained in accordance with Section 4d(f) 
of the CEA and rules thereunder, to maintain minimum margin levels with 
respect to any customer transaction in a program to commingle and 
portfolio margin CDS at least equal to the amount determined using a 
margin methodology established and maintained by the BD/FCM that has 
been approved by the Commission or its staff. As part of the approval 
process, a BD/FCM would be expected to submit certain information in 
order to make a determination regarding the performance of the margin 
methodology. The Commission anticipates that information would be 
substantially similar to information required in Appendix E to Exchange 
Act Rule 15c3-1 to the extent relevant to portfolio margining CDS that 
are swaps and security-based swaps. Based on similar estimates, the 
Commission estimates that each BD/FCM that seeks approval from the 
Commission would spend approximately 1,000 hours to create and compile 
the various documents to provide to Commission staff and to work with 
Commission staff through the approval process.\75\ This includes 
approximately 100 hours for an in-house attorney to complete a review 
of the information and documentation provided to the Commission staff. 
Consequently, the Commission estimates the total one-time burden 
associated with this requirement to be 57,000 hours.\76\
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    \75\ This estimate is based on the Commission's currently 
approved Collection of Information Supporting Statement for Rule 
15c3-1 of the Exchange Act, which discusses the reporting burden for 
broker-dealers to apply and receive approval from the Commission to 
use Appendix E to Rule 15c3-1 of the Exchange Act (available at 
http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201006-3235-004).
    \76\ 1,000 hours x 57 BD/FCMs.
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    Paragraph IV(b)(6) of this Order requires each BD/FCM receiving any

[[Page 75223]]

money, securities, or property of a customer to margin, guarantee or 
secure positions consisting of cleared CDS, which include both swaps 
and security-based swaps, under a program to commingle and portfolio 
margin CDS in an account maintained in accordance with Section 4d(f) of 
the CEA and the rules thereunder to disclose to its customers that (i) 
the customer's money, securities, and property will be held in an 
account maintained in accordance with the segregation requirements of 
Section 4(d)f of the CEA and that the customer has elected to seek 
protections under Subchapter IV of Chapter 7 of Title 11 of the United 
States Code and the rules and regulations thereunder with respect to 
such money, securities, and property and (ii) that the broker-dealer 
segregation requirements of Section 15(c)(3) and Section 3E of the 
Exchange Act, and any customer protections under SIPA and the 
stockbroker liquidation provisions, will not apply to such customer 
money, securities, and property. These disclosures provide customers 
important disclosures regarding the legal framework that will govern 
their transactions if a liquidation were to occur. The Commission 
believes that the BD/FCM could use the language in the Order that 
describes the disclosure that must be made as a template to draft the 
disclosure statement. Consequently, the Commission estimates that it 
would take a BD/FCM clearing member approximately 8 hours to draft the 
disclosure statement.\77\ Further, the Commission believes the BD/FCM 
will include this disclosure statement with other documents or 
agreements provided to cleared CDS customers and as a result the BD/FCM 
should not be subject to any additional burden associated with relaying 
this information to the customer. Therefore, the Commission estimates 
that aggregate burden from this requirement will be 456 hours \78\ to 
comply with this requirement.
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    \77\ This estimate is based on the Commission's currently 
approved Collection of Information Supporting Statement for Rule 
15c3-3 of the Exchange Act, which discusses the reporting burden to 
prepare a disclosure statement pursuant to Rule 15c3-3 of the 
Exchange Act (http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201103-3235-025).
    \78\ 57 BD/FCMs x 8 hours.
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E. Collection of Information Is Mandatory

    The collections of information contained in the conditions to this 
Order are mandatory for any entity wishing to rely on the conditional 
exemptions granted by this Order.

F. Confidentiality

    The Commission expects to receive confidential information in 
connection with the proposed collections of information. To the extent 
that the Commission receives confidential information pursuant to these 
collections of information, the Commission is committed to protecting 
the confidentiality of such information, subject to the provisions of 
applicable law.\79\
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    \79\ See, e.g., Exchange Act Section 24, 15 U.S.C. 78x 
(governing the public availability of information obtained by the 
Commission) and 5 U.S.C. 552 et seq. (Freedom of Information Act--
``FOIA''). FOIA Exemption 4 provides an exemption for ``trade 
secrets and commercial or financial information obtained from a 
person and privileged or confidential.'' 5 U.S.C. 552(b)(4). FOIA 
Exemption 8 provides an exemption for matters that are ``contained 
in or related to examination, operating, or condition reports 
prepared by, on behalf of, or for the use of an agency responsible 
for the regulation or supervision of financial institutions.'' 5 
U.S.C. 552(b)(8).
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G. Request for Comment on Paperwork Reduction Act

    The Commission requests, pursuant to 44 U.S.C. 3506(c)(2)(B), 
comment on the collections of information contained in this Order to:
    (i) Evaluate whether the collections of information are necessary 
for the proper performance of the functions of the Commission, 
including whether the information would have practical utility;
    (ii) Evaluate the accuracy of the Commission's estimates of the 
burden of the collections of information;
    (iii) Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and
    (iv) evaluate whether there are ways to minimize the burden of the 
collections of information on those required to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons who desire to submit comments on the collection of 
information requirements should direct their comments to the OMB, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, and refer to File No. S7-13-12. OMB is 
required to make a decision concerning the collections of information 
between 30 and 60 days after publication of this document in the 
Federal Register; therefore, comments to OMB are best assured of having 
full effect if OMB receives them within 30 days of this publication. 
The Commission has submitted the proposed collections of information to 
OMB for approval. Requests for the materials submitted to OMB by the 
Commission with regard to these collections of information should be in 
writing, refer to File No. S7-13-12, and be submitted to the Securities 
and Exchange Commission, Records Management Office, 100 F Street NE., 
Washington, DC 20549.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-30553 Filed 12-18-12; 8:45 am]
BILLING CODE 8011-01-P


